Billionaire John Paulson, the best-known gold bull since he started wagering on bullion more than three years ago, is backing away from his bet.
Paulson told clients at his firm’s annual meeting Nov. 20 that he personally wouldn’t invest more money in his gold fund because it’s not clear when inflation will accelerate, according to a person familiar with the matter. The hedge-fund manager, who has been betting that bullion would rally as a hedge against inflation and as recently as last year told clients that gold was his best long-term bet, has lost 63 percent year-to-date in the PFR Gold Fund, said the person, who was briefed on the returns and asked not to be identified because the information is private.
Paulson, 57, started his foray into gold in early 2009, betting that bullion would rise as governments printed money to revive their economies following the 2008 financial crisis. Gold-related securities helped drive losses for the firm in 2012 as mining company stocks fell. Paulson & Co.’s main strategies have gained this year on bets in mergers, defaulted securities, convertible bonds and telecommunications, energy, insurance and asset-management companies.
The fund, which has shrunk to $370 million -- with most of that John Paulson’s own money -- from $1 billion at the end of 2012, fell 1.2 percent in October, the person said. The hedge-fund firm will maintain the fund’s positions in gold stocks and let options related to bullion expire, Paulson said at the meeting in Paulson & Co.’s New York office, according to the person.
Armel Leslie, a spokesman for $19 billion Paulson & Co. with WalekPeppercomm, declined to comment on the meeting and fund returns.
Gold is heading for its first annual drop in 13 years as some investors lost faith in the metal as a store of value, fueled by concern that expected reductions in $85 billion of monthly bond buying by the U.S. Federal Reserve will ease the risk of accelerating inflation. Billionaires George Soros and Daniel Loeb sold their entire positions in the SPDR Gold Trust exchange-traded fund in the second quarter, according to regulatory filings. Inflation expectations as measured by the break-even rate for five-year Treasury Inflation Protected Securities fell 12 percent this year.
Bullion has slumped 26 percent this year to $1,246.30 an ounce at 3:21 p.m. in London and reached $1,236.88 yesterday, the lowest since July 9.
Hedge funds and other money managers have cut their net-long positions in gold to 55,456 futures and options as of Nov. 12, according to the latest data from the U.S. Commodity Futures Trading Commission. The holdings are down 48 percent this year.
Paulson had so much conviction on gold that he used the ETF to start share classes for his funds that were denominated in bullion, allowing investors to decouple their holdings from the value of the U.S. dollar. He put most of his personal investment in the funds into the gold shares.
Paulson this year changed the name of the gold fund to PFR Gold Fund, which stands for the initials of Paulson and gold specialists Victor Flores and John Reade, and started reporting returns separately from the firm’s other funds. The firm told clients in a letter in June that it has no intention of closing down the strategy and recommended investors stay invested as valuations provide a “significant upside.”
Paulson & Co.’s main strategies have risen in November, in part from the firm’s investment in Extended Stay America Inc., according to a person familiar with the matter. The largest owner of mid-price long-stay hotels in the U.S. jumped 20 percent since its trading debut on Nov. 13 after raising $565 million in an initial public offering.
The Recovery Fund gained 53 percent this year through Nov. 19, the Paulson Partners Enhanced Fund rose 28 percent, the Advantage Plus Fund increased 25 percent, the Advantage Fund jumped 21 percent and the Credit Opportunities Fund advanced 21 percent, according to a person briefed on the returns, who asked not to be identified because the information is private.
Global equities advanced to the highest in almost six years this week and U.S. inflation is running at 1 percent, half the rate of the past decade. Gold is still heading for a significant decline in 2014, Goldman Sachs Group Inc. said in a report on Nov. 20 outlining investment themes for next year. Bullion may drop to $1,050 by the end of the year, analysts including Jeffrey Currie wrote. Prices in 2013 are headed for the worst annual decline since 1981.
The meaning of gold price movements remains a subject of dispute among economists. In July, Republican Senator Dean Heller of Nevada asked Fed Chairman Ben S. Bernanke to explain gold’s roller-coaster rise and fall.
“Nobody really understands gold prices,” said Bernanke, who was chairman of Princeton University’s economics department. “And I don’t pretend to really understand them either.”
Heller earlier this month posed a similar question to Fed Vice Chairman Janet Yellen at a hearing on her nomination to succeed Bernanke.
“I don’t think anybody has a very good model of what makes gold prices go up or down,” Yellen said. “It is an asset that people want to hold when they’re very fearful about potential financial market catastrophe or economic troubles.”